Question

HW 08 - Stocks and Their Valuation The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value-added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you've done in previous problems, but it focuses on a firm's free cash flows (FCFS) instead of its dividends. Some firms don't pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model. St. Margaret Beer Co. has an expected net operating profit after taxes, EBIT(1 - 1), of $4,600 million in the coming year. In addition, the firm is expected to have net capital expenditures of $690 million, and net operating working capital (NOWC) is expected to increase by $15 million. How much free cash flow (FCF) is St. Margaret Beer Co. expected to generate over the next year? $93,524 million $3,925 million $3,895 million $5,275 million O St. Margaret Beer Co.'s FCFs are expected to grow at a constant rate of 3.54% per year in the future. The market value of St. Margaret Beer Co.'s outstanding debt is $24,756 million, and preferred stocks' value is $13,754 million St. Margaret Beer Co. has 225 million shares of common stock outstanding, and its weighted average cost of capital (WACC) equals 10.62%. Term Value (Millions) Using the preceding information and the FCF you calculated in the previous question, calculate the appropriate values in this table. Total firm value Value of common equity Intrinsic value per share

Answer 1

Question 1:

FCF = EBIT * (1 - Tax) + Depreciation - Net capex - Increase in NOWC

FCF = $4600 mil - $690 mil - $15 mil

FCF = $3,895 million

Question 2:

Value of firm can be calculated as:

$Value = \frac{FCF_1}{r - g}$

$Value = \frac{3895}{0.1062 - 0.0354}$

$Value = 55,014.12$ ---> Answer 1

Value of Common Equity = Value of firm - Value of debt - Value of preferred stock

Value of common equity = $55,014.12 mil - $24,576 mil - $13,754 mil = $16,684.12 ---> Answer 2

Intrinsic value per share = Value of common equity/Number of common stocks

Intrinsic value = $16,684.12 mil/225 mil = $74.15 ---> Answer 3